FILEDAUG 13 2018
SUSAN M. SPRAUL, CLERKU.S. BKCY. APP. PANELOF THE NINTH CIRCUIT
NOT FOR PUBLICATION
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re:
NOAM BOUZAGLOU,
Debtor.
NOAM BOUZAGLOU,
Appellant,
v.
JEANNE HAWORTH, Successor Trustee
to McGinty Family Trust; KATHLEEN
McGINTY,
Appellees.
BAP No. CC-17-1253-SKuF
Bk. No. 2:14-bk-25055-DS
Adv. No. 2:14-ap-01645-DS
MEMORANDUM*
Argued and Submitted on July 27, 2018
in Pasadena, California
Filed – August 13, 2018
Appeal from the United States Bankruptcy Court
for the Central District of California
Honorable Deborah J. Saltzman, Bankruptcy Judge, Presiding
* This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
Appearances: Shai S. Oved argued for appellant; John P. Byrne argued
for appellees.
Before: SPRAKER, KURTZ, and FARIS, Bankruptcy Judges.
INTRODUCTION
Creditors Kathleen McGinty and Jeanne Haworth, successor trustee
of the McGinty Family Trust, obtained a fraud judgment after trial in
California state court against debtor Noam Bouzaglou. After Bouzaglou
commenced his chapter 71 bankruptcy case, Haworth and Kathleen2 sued
him to determine the nondischargeability of the judgment debt. The
bankruptcy court granted the creditors’ summary judgment motion,
determining that there was no genuine issue of material fact because of the
preclusive effect of the state court judgment. We agree, and we AFFIRM.
FACTS
The McGinty family built their family home in the 1940s in Santa
Monica, California, using a home building kit bought from Sears Roebuck
1 Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532. All “Rule” references are to the Federal Rules
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of
Civil Procedure.
2 We refer to various members of the McGinty family by their first name for ease
of reference. No disrespect is intended.
2
Co. Kathleen lived in the home for over 50 years. She has been diagnosed
with autism and never has been able to financially support herself. She
currently lives independently with the continued support of family and
friends.
Her brother Timothy at one time lived independently, but he moved
back into the family home with Kathleen after the death of their mother
Delores in 2009. Timothy was Kathleen’s sole surviving immediate relative,
and he ostensibly moved back into the family home to help care for her, but
he battled his own mental health problems, including bipolar disorder,
severe depression, schizophrenia, and substance abuse. He attempted
suicide in April 2012, and died after suffering a stroke in October 2012.3
The family home was held in a special needs trust for Kathleen’s
benefit established by Delores in 2006. After Delores died, Timothy became
the successor trustee of the trust. By that time, the home and its detached
garage were in need of repair. In 2010, Timothy contracted with Triangle
Construction, Inc. to make repairs to both the home and the garage and
3 We have derived a number of the background facts set forth in this factual
discussion from the February 1, 2017 California Court of Appeal decision affirming the
judgment against Bouzaglou’s wholly-owned construction company, Ness Adams, Inc.
(Cal. Ct. App. Dkt. No. B260148). Bouzaglou has not disputed these background facts,
nor has he provided us with a record that would have been sufficient to support a
challenge to these facts. As a result, we are entitled to presume that his failure to do so
means he does not believe these actions would have been helpful to his appeal. See Hsu
v. Bank of Taiwan (In re Hsu), BAP No. CC-09-1242-BMoPa, 2010 WL 6259986, at *4 (9th
Cir. BAP Mar. 24, 2010) (citing McCarthy v. Prince (In re McCarthy), 230 B.R. 414, 416–417
(9th Cir. BAP 1999)).
3
later entered into an amended contract to include designs and permits for a
complete rebuild of the garage. Bouzaglou worked as a salesman for
Triangle, and he first met Timothy and Kathleen in late 2010. At that time,
the home was unencumbered and appraised for $755,000. Triangle never
performed any actual construction work on the home.
In April 2011, Timothy again met with Bouzaglou. This time,
Bouzaglou acted in his capacity as owner and operator of his own wholly-
owned construction company: Ness Adams, Inc. After meeting with
Bouzaglou in April 2011, Timothy contracted with Ness in June 2011 to
remodel the house, including a new 650 square foot guesthouse for
$397,000. This new contract with Bouzaglou also included the rebuilding of
the garage.
With Bouzaglou’s help, Timothy obtained a $400,000 home loan, and
Bouzaglou’s attorney Andrew Stern took control of the loan proceeds. In
August 2011, Stern paid $270,000 of the loan proceeds to Ness. Over the
course of 2011 and 2012, Timothy signed a series of work orders. The work
orders increased Ness’s construction fees by hundreds of thousands of
dollars. Much of the work described in the work orders was duplicative.
The fourth and final work order cancelled the construction of the
guesthouse but did not reflect any credit for the cancelled work. Timothy
supposedly signed this fourth work order one day after he attempted to
commit suicide and while hospitalized under a psychiatric hold.
4
Timothy was released from the hospital in early May 2012. One week
later, Bouzaglou induced Timothy to sign an agreement and a quitclaim
deed transferring title to the home to Bouzaglou. Timothy died in October
2012. Haworth, Timothy’s cousin, replaced him as trustee of the McGinty
trust.
Thereafter, Kathleen and Haworth sued Bouzaglou, Ness, and Stern
in state court. Their first amended complaint contained multiple causes of
action, including rescission, fraud, breach of fiduciary duty, constructive
trust and cancellation of deed. Among other things, Kathleen and Haworth
alleged that Bouzaglou fraudulently induced Timothy to transfer title to
the home by making numerous misrepresentations, including the
following:
That MCGINTY needed to fire his existing contractor, Triangle
Construction, and hire BOUZAGLOU's construction company,
NESS ADAM, INC., instead (Aug 2011);
That the McGinty Family Home needed much more
construction work and needed to be fully rebuilt and an
addition built (Aug 2011);
That if the McGinty Family Home was remodeled according to
BOUZAGLOU's advice, it could be sold for a huge profit that
would repay all loans and costs, leaving MCGINTY with
money with which to support himself and his disabled sister
(Aug 2011);
That the cost of the construction work would be $270,000.00
5
(Aug 2011);
That MCGINTY needed to take out a $400,000.00 mortgage in
order to pay for the construction work (Aug 2011);
That BOUZAGLOU was entitled to a $270,000.00 advance
payment for the work (Aug 2011);
That the profits from the sale of the house would repay the loan
and leave MCGINTY with a profit (Aug 2011 —May 16, 2012);
That in order to complete the remodel of the house, an
additional $450,000.00 in funds was needed (May 2012);
That MCGINTY could not obtain the necessary financing so he
needed to quitclaim the house to BOUZAGLOU (May 2012);
That McGinty would receive $550,000.00 from the proceeds of
the sale of the house (May 2012).
After trial, the jury returned a verdict finding that Bouzaglou had
committed fraud and, as a result, had caused compensatory damages in the
amount of $803,280.00 and should be held liable for exemplary damages of
ten times that amount, or $8,032,800.00.
In the process of holding Bouzaglou liable for fraud, the jury
specifically and affirmatively found that the following fraud elements were
present:
• that “Bouzaglou made a false representation of an important fact to
Timothy”;
6
• that “Bouzaglou knew that the representation was false, or that he
made the representation recklessly and without regard for the truth”;
• that “Bouzaglou intended that Timothy . . . as Trustee rely on the
representation”;
• that “Timothy . . . as Trustee reasonably relied on the
representation”;
• that Timothy’s reliance on Bouzaglou’s representation “was a
substantial factor” in inducing Timothy as Trustee to mortgage and
to transfer title to the home;
• that the trust or Kathleen were harmed by the mortgaging and
transfer of title to the family home;
• that Bouzaglou acted recklessly, with malice and with fraud; and
• that Bouzaglou’s fraud caused the trust to suffer $803,280.00 in
damages.
After the jury returned its verdict, the state court held a bench trial on
Haworth’s and Kathleen’s equitable claims. In relevant part, those claims
sought rescission of the title transfer agreement and cancellation of the
quitclaim deed transferring the home from the trust to Bouzaglou. The
state court, on April 28, 2014, referenced with approval the jury’s fraud
findings and also specifically found itself that “fraud has been proven” and
that Bouzaglou and Ness “engaged in fraud.” The state court further found
that the property transfer agreement was “induced by fraud.”
7
Bouzaglou commenced a chapter 13 case on May 6, 2014, which was
dismissed on August 8, 2014, because Bouzaglou’s debt exceeded the
eligibility limits for chapter 13 debtors. Bouzaglou filed the instant
bankruptcy case – a chapter 7 case - on August 5, 2014. Bouzaglou then
moved to extend the automatic stay beyond the thirty-day limit imposed
for successive bankruptcy filings under § 362(c)(3)(A). On September 12,
2014, the bankruptcy court granted that motion, except the court excluded
Haworth’s and Kathleen’s prosecution of the state court action from the
stay’s coverage.
The state court entered judgment against Bouzaglou, Ness and Stern
on September 18, 2014. Pursuant to an election of remedies, the trust opted
for its equitable remedies over compensatory damages against Bouzaglou,
so the judgment awarded the trust no compensatory damages against him,
but instead provided for cancellation of the quitclaim deed and rescission
of the property transfer agreement. Nonetheless, the judgment still
awarded $8,032,800.00 in exemplary damages against Bouzaglou and in
favor of the trust. The judgment also awarded Kathleen $17,000 in
compensatory damages as against Bouzaglou. Meanwhile, the judgment
awarded the trust $1,331,608.77 in compensatory damages and
$13,316,087.70 in exemplary damages as against Ness.
Both Bouzaglou and Ness appealed the state court judgment. The
California court of appeal affirmed the judgment against Ness. As for
8
Bouzaglou’s appeal, the state appellate court dismissed it for lack of
standing. As the state appellate court explained, Bouzaglou’s defensive
appeal rights were property of his bankruptcy estate, and he had not
provided any evidence that the bankruptcy trustee had abandoned the
estate’s interest in the appeal rights.4
On October 8, 2014, Haworth and Kathleen commenced their
nondischargeability adversary proceeding, stating causes of action under
§ 523(a)(2)(A) and (a)(4). After the California court of appeal issued its
decision disposing of the appeal from the state court fraud judgment,
Haworth and Kathleen filed their summary judgment motion, asserting
that they were entitled to judgment as a matter of law in light of the
preclusive effect of the state court judgment.
In opposition to the summary judgment motion, Bouzaglou argued
that the bankruptcy court should not give preclusive effect to the state
court judgment because he had been prevented from pursuing his appeal.
Bouzaglou had sought to compel the abandonment of his appeal rights so
that he could continue the appeal. By this time, Kathleen had filed her own
bankruptcy petition under chapter 11, and a chapter 11 trustee had been
appointed. Kathleen’s chapter 11 trustee objected to abandonment of the
4 Bouzaglou moved to compel the chapter 7 trustee to abandon the appeal rights,
but the bankruptcy court denied that motion. Bouzaglou never appealed the denial of
his abandonment motion.
9
appeal rights.5 As Bouzaglou put it, Kathleen’s chapter 11 trustee made an
offer to purchase the appeal rights, which he later withdrew. Ultimately,
the bankruptcy court denied the motion to compel Bouzaglou’s trustee to
abandon the appeal rights, concluding that the motion was vague, lacked
evidence of value, and failed to present a prima facie case for
abandonment. According to Bouzaglou, the purchase offer had the effect of
preventing him from prosecuting his appeal because, as Bouzaglou
explained, the state appeals court dismissed his appeal for lack of standing.
As a result, he argued that the judgment was not final for issue preclusion
purposes because he was denied the opportunity to make his arguments on
appeal.
Bouzaglou also argued in his summary judgment opposition that the
state court judgment and findings were insufficient to support issue
preclusion on Kathleen’s claim for an exception to discharge under
§ 523(a)(2)(A). Bouzaglou maintained that one could not tell from the
findings and judgment whether the elements of fraud were specifically
found because a number of the causes of action alleged in Haworth’s and
Kathleen’s first amended complaint did not sound in fraud. He further
claimed that the findings and judgment were not detailed enough for issue
preclusion because the jury verdict did not identify the specific
5 Kathleen’s chapter 11 case was later converted to chapter 7 and eventually
dismissed.
10
misrepresentations that Bouzaglou allegedly made. Bouzaglou also
assailed the compensatory damages award as incorrect and the exemplary
damages award as excessive.
At the hearing on the summary judgment motion, the bankruptcy
court rejected Bouzaglou’s arguments. The court concluded that all five
threshold elements for applying issue preclusion were present. In relevant
part, the court ruled that the jury verdict contained findings on each
element necessary for nondischargeable fraud. The court also ruled that the
fact that Bouzaglou did not get to prosecute his state court appeal did not
render the judgment non-final under issue preclusion doctrine. Based on
these rulings, the bankruptcy court granted summary judgment on the
§ 523(a)(2)(A) claim.
On August 16, 2017, the bankruptcy court entered judgment in favor
of Haworth and Kathleen on the § 523(a)(2)(A) claim for the outstanding
amount of the punitive damages previously awarded and dismissed their
§ 523(a)(4) claim. Bouzaglou timely appealed the judgment.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Did the bankruptcy court commit reversible error when it granted
summary judgment against Bouzaglou based on the preclusive effect of the
11
state court fraud judgment?
STANDARDS OF REVIEW
We review de novo the bankruptcy court’s grant of summary
judgment. Plyam v. Precision Dev., LLC (In re Plyam), 530 B.R. 456, 461 (9th
Cir. BAP 2015). We also review de novo the bankruptcy court’s
determination that issue preclusion is available. Lopez v. Emerg. Serv.
Restoration, Inc. (In re Lopez), 367 B.R. 99, 103 (9th Cir. BAP 2007). When we
review an issue under the de novo standard of review, “we consider [the]
matter anew, as if no decision had been rendered previously.” Kashikar v.
Turnstile Capital Mgmt., LLC (In re Kashikar), 567 B.R. 160, 164 (9th Cir. BAP
2017).
If we determine that issue preclusion is available, we then review the
bankruptcy court’s decision to apply it for an abuse of discretion. In re
Lopez, 367 B.R. at 103. A bankruptcy court abuses its discretion if it applies
the wrong legal standard or its findings of fact are illogical, implausible or
without support in the record. TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d
820, 832 (9th Cir. 2011).
DISCUSSION
A. Governing Law.
1. Legal Standards Governing Summary Judgment.
Under Civil Rule 56(a), made applicable in adversary proceedings by
Rule 7056, the court shall grant summary judgment when “the movant
12
shows that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” A factual dispute is
genuine if, on the record presented, a reasonable trier of fact could find in
favor of the non-moving party. Far Out Prods., Inc. v. Oskar, 247 F.3d 986,
992 (9th Cir. 2001) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248–49
(1986)). And a fact is “material” if it might affect the outcome of the case. Id.
Once the moving party has met its initial burden, the non-moving party
must show specific facts establishing the existence of genuine issues of fact
for trial. Anderson, 477 U.S. at 256.
2. Legal Standards Governing Issue Preclusion.
Issue preclusion applies in nondischargeability proceedings. Grogan
v. Garner, 498 U.S. 279, 284 n.11 (1991). Because the relevant judgment was
rendered under California law, full faith and credit principles require us to
apply California issue preclusion law. See 28 U.S.C. § 1738; Cal–Micro, Inc.
v. Cantrell (In re Cantrell), 329 F.3d 1119, 1123 (9th Cir. 2003).
Under California law, issue preclusion is available if:
(1) the issue sought to be precluded from relitigation is identical
to that decided in a former proceeding; (2) the issue was
actually litigated in the former proceeding; (3) the issue was
necessarily decided in the former proceeding; (4) the decision in
the former proceeding is final and on the merits; and (5) the
party against whom preclusion is sought was the same as, or in
privity with, the party to the former proceeding.
In re Plyam, 530 B.R. at 462 (citing Lucido v. Sup. Ct., 51 Cal. 3d 335,
13
341(1990)).
The party asserting issue preclusion has the burden of proving all of
the elements necessary to establish its availability. Kelly v. Okoye (In re
Kelly), 182 B.R. 255, 258 (9th Cir. BAP 1995). “To sustain this burden, the
party must introduce a record sufficient to reveal the controlling facts and
pinpoint the exact issues litigated in the prior action.” Id. Any reasonable
doubt as to what was decided in the prior action should be resolved against
the application of issue preclusion. Id.
Even when the party asserting issue preclusion establishes the five
threshold factors, application of issue preclusion is discretionary rather
than automatic. In re Lopez, 367 B.R. at 107-08. In exercising that discretion,
the trial court ordinarily needs to consider the circumstances of the
particular case and whether application of the doctrine in that case is fair
and consistent with the policies underlying the doctrine. Baldwin v.
Kilpatrick (In re Baldwin), 249 F.3d 912, 919–20 (9th Cir. 2001); In re Lopez, 367
B.R. at 107-08; see also Christopher Klein et al., Principles of Preclusion &
Estoppel in Bankruptcy Cases, 79 AM. BANKR. L. J. 839, 855 (2005).
B. Bouzaglou’s Arguments On Appeal.
Bouzaglou makes four arguments on appeal. He challenges whether
the issues in the state case were identical to the fraud necessary to except
the debt from discharge under § 523(a)(2)(A). While Bouzaglou does not
dispute that the parties actually litigated a fraud claim in state court, he
14
maintains that the record is unclear as to what was necessarily decided for
purposes of issue preclusion. Bouzaglou also argues that the state court’s
decision was not final. He does not deny that the parties in both matters are
identical, but he contends that the bankruptcy court should have exercised
its discretion not to apply issue preclusion in light of his inability to
proceed with the appeal in the state court. Finally, Bouzaglou argues that
the state court erred in the damages awarded. We address each argument
in turn.
1. Issues Decided In State Court.
Bouzaglou first argues that, on the record presented, it is impossible
to tell which issues were necessarily decided in the state court. He posits
that we don’t really know what the jury was thinking when it returned its
verdict against him because there were multiple causes of action stated in
Haworth’s and Kathleen’s first amended complaint. Bouzaglou further
maintains that the jury’s findings were insufficient to support the
availability of issue preclusion because they did not identify the specific
misrepresentations Bouzaglou allegedly made.
Bouzaglou’s argument regarding the issues decided is devoid of
merit. As the bankruptcy court noted, the jury specifically and distinctly
found each and every element necessary for a fraud judgment under
California law. The elements for fraud under § 523(a)(2)(A) are identical.
Younie v. Gonya (In re Younie), 211 B.R. 367, 373–74 (9th Cir. BAP 1997); see
15
also Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 382-83 (9th Cir. BAP
2011) (identifying fraud elements under California law); Oney v. Weinberg
(In re Weinberg), 410 B.R. 19, 35 (9th Cir. BAP 2009) (identifying same fraud
elements under § 523(a)(2)(A)).
Simply put, the jury verdict was more than sufficient to demonstrate
that Bouzaglou had been found liable for fraud. The verdict not only
included an affirmative finding for each element of fraud, but also
identified fraud as the sole ground for the relief granted. Thus, fraud was
necessarily decided by the jury. See In re Baldwin, 249 F.3d at 919 & n.6
(application of issue preclusion supported by the judgment because it was
clear, in spite of a lack of specific findings, precisely what the state court
must have found in order to render its judgment); Choi v. Kim (In re Kim),
Bk. No. 99-03303, 2003 WL 22939483, at *3 (Bankr. D. Haw. Jan. 10, 2003)
(same); see also Zeppinick v. Ramirez (In re Zeppinick), BAP No.
CC–16–1293–LKuF, 2017 WL 1457944, at *4 (9th Cir. BAP Apr. 24, 2017)
(“there is no requirement that the entire record of the underlying
proceedings be produced if the issues can be ascertained from the
documents presented.”) Accordingly, we reject Bouzaglou’s argument that
the elements of fraud were not necessarily decided in the state court action.
2. Finality of State Court Judgment & Bouzaglou’s Appeal
Rights.
Bouzaglou next argues that the bankruptcy court should not have
applied issue preclusion because he was deprived of his right to appeal the
16
state court judgment. He blames Kathleen, or her chapter 11 trustee, for
this so-called deprivation. Bouzaglou points to the fact that the chapter 11
trustee submitted an offer (later withdrawn) to purchase Bouzaglou’s
defensive appeal rights, which in turn caused the bankruptcy court to deny
Bouzaglou’s motion to abandon the appeal rights as property of his
bankruptcy estate.
In blaming Kathleen and her chapter 11 trustee, Bouzaglou ignores
the fact that he voluntarily filed a chapter 7 bankruptcy case. As a result of
his decision, his appeal rights, as prepetition property, automatically
became property of his bankruptcy estate. See § 541(a); see also Fridman v.
Anderson (In re Fridman), BAP No. CC-15-1151-FKiKu, 2016 WL 3961303, at
*7 (9th Cir. BAP July 15, 2016). Because the appeal rights belonged to
Bouzaglou’s bankruptcy estate, the state appellate court correctly
dismissed his appeal for lack of standing. See Estate of Spirtos v. One San
Bernardino Cty. Super. Ct. Case Numbered SPR 02211, 443 F.3d 1172, 1175-76
(9th Cir. 2006) (holding that the Code vests chapter 7 trustee with the
exclusive right to sue on behalf of the estate).
In any event, there is no factual or legal basis for Bouzaglou’s
contention that the state court judgment was not final because his state
court appeal was dismissed on standing grounds. As a practical matter, his
appeal rights were fully exhausted and there was no means left for him to
directly challenge the state court judgment. Just because a state appellate
17
court did not hear and decide Bouzaglou’s appeal on the merits does not
mean the state court judgment was not final for issue preclusion purposes.
See, e.g., Sabek, Inc. v. Engelhard Corp., 65 Cal. App. 4th 992, 999 (1998); Stuart
v. Dep't of Real Estate, 148 Cal. App. 3d 1, 4 (1983); Smith v. Smith, 127 Cal.
App. 3d 203, 209 (1981).
Most jurisdictions, including California, recognize an exception to
issue preclusion when the party against whom issue preclusion is sought
had no opportunity, as a matter of law, to appeal or otherwise obtain
judicial review of the adverse ruling. See Restatement (Second) of
Judgments § 28(1); Anderson-Cottonwood Disposal Serv. v. Workers’ Comp.
Appeals Bd., 135 Cal. App. 3d 326, 332–33, (1982); see also Radcliffe v. Rainbow
Constr. Co., 254 F.3d 772, 787-88 (9th Cir. 2001) (citing California law). But
this exception does not apply when the party against whom issue
preclusion is sought voluntarily relinquishes the opportunity to appeal.
See, e.g., Sabek, Inc., 65 Cal. App. 4th at 999; Stuart, 148 Cal. App. 3d at 4;
Smith, 127 Cal. App. 3d at 209; see also Restatement (Second) of Judgments §
28(1), cmt. a (“The exception in Subsection (1) applies only when review is
precluded as a matter of law. It does not apply in cases where review is
available but is not sought.”).
Here, Bouzaglou chose to file a chapter 7 petition and thereby
voluntarily relinquished to the chapter 7 trustee the right to pursue, or not
pursue, the appeal from the state court judgment. Even then, had
18
Bouzaglou persuaded the bankruptcy court to exercise its discretion to
compel the chapter 7 trustee to abandon the appeal rights to Bouzaglou, he
could have moved forward with the appeal. But the bankruptcy court was
not so persuaded. Bouzaglou never appealed the order denying the
abandonment motion and that denial is beyond the scope of this appeal.
In short, the fact that the state appellate court did not hear and decide
the merits of Bouzaglou’s appeal does not militate against the bankruptcy
court’s application of issue preclusion in this case.
3. Fairness And Policy Considerations.
Bouzaglou argues, for the first time on appeal, that the application of
issue preclusion was not consistent with sound public policy because he
was not given the opportunity to prosecute his appeal. We disagree. We
already have explained, above, that Bouzaglou voluntarily relinquished his
right to prosecute his appeal when he filed his chapter 7 petition and that
his choice to relinquish that right does not militate against the application
of issue preclusion.
More generally, the California Supreme Court has identified three
fundamental policies that support the application of issue preclusion in
appropriate cases: “preservation of the integrity of the judicial system,
promotion of judicial economy, and protection of litigants from harassment
by vexatious litigation.” Lucido, 51 Cal. 3d at 343. Thus, under Lucido, the
trial court’s decision to apply issue preclusion ultimately is a matter of
19
discretion, which turns on whether its application is consistent with these
policies. Id. at 343-44.
Bouzaglou did not argue in the bankruptcy court that, based on the
above-referenced policy concerns, the bankruptcy court should have
refrained from exercising its discretion to apply issue preclusion. We
typically decline to address issues raised for the first time on appeal. See
generally Mano–Y & M, Ltd. v. Field (In re Mortg. Store, Inc.), 773 F.3d 990, 995
(9th Cir. 2014) However, we will exercise our discretion, here, to consider
the policy concerns Bouzaglou belatedly has raised. Even though the
bankruptcy court made no explicit assessment of whether the application
of issue preclusion was consistent with the above-referenced policies, we
can do so in the first instance because the record here gives us a complete
understanding of these issues. See In re Baldwin, 249 F.3d at 919–20; see also
Jess v. Carey (In re Jess), 169 F.3d 1204, 1208-09 (9th Cir. 1999); Swanson v.
Levy, 509 F.2d 859, 860-61 (9th Cir. 1975).
Issue preclusion typically preserves the judicial system’s integrity by
eliminating the risk of inconsistent judgments by different courts. In re
Baldwin, 249 F.3d at 920 (citing Lucido, 51 Cal. 3d at 347). Similar to Baldwin,
the state court here was “fully capable of adjudicating the issue
subsequently presented to the bankruptcy court,” and thus “the public’s
confidence in the state judicial system would be undermined should the
bankruptcy court relitigate the question” of Bouzaglou’s fraud. In re
20
Baldwin, 249 F.3d at 920.6
As for judicial economy, Baldwin held that this policy “obviously”
favored application of issue preclusion under the circumstances because its
application would prevent the unnecessary retrial in the bankruptcy court
of issues already fully and finally determined in the state court. Id. The
same is true here. The state court already determined the fraud issues. The
retrial of those exact same issues in the bankruptcy court would constitute
an unjustified waste of judicial resources. In addition, retrial would be
inconsistent with Grogan, 498 U.S. at 284-85 & n.11, which recognized that,
in appropriate cases, issue preclusion should prevent wasteful relitigation
of state court findings also relevant in federal exception to discharge
actions.
Finally, with respect to protection of parties from vexatious litigation,
this policy also favored the bankruptcy court’s application of issue
preclusion. Similar to the facts in Baldwin, Bouzaglou has not presented
anything that establishes he was denied a full and fair opportunity to
litigate the fraud issues in the state court. Rather, he simply disagrees with
the outcome at trial and would like another chance to relitigate the matter.
Consequently, it would have been unfair to Haworth and Kathleen to
require them to relitigate the fraud issues in the bankruptcy court when
6 Baldwin further pointed out that relitigation in the bankruptcy court would
undermine the principle of federalism that underlies the Full Faith and Credit Act,
28 U.S.C. § 1738. In re Baldwin, 249 F.3d at 920.
21
they already successfully had done so in the state court. See In re Baldwin,
249 F.3d at 920.
In sum, the above-referenced fairness and policy considerations
supported the bankruptcy court’s application of issue preclusion in this
case.7
4. Exemplary Damages Issue.
The final argument we must address concerns the roughly $8,000,000
in exemplary damages the state court judgment awarded against
Bouzaglou and the bankruptcy court’s determination that those damages
are nondischargeable.
It is beyond cavil that all debts arising from a debtor’s fraudulent
conduct, including punitive damages, are nondischargeable. See Cohen v. de
la Cruz, 523 U.S. 213, 223 (1998). Nonetheless, Bouzaglou contends that the
amount of exemplary damages awarded was so unreasonable and so
disproportionate to the amount of compensatory damages incurred that the
7 Our decision on this point is bolstered by the fact that the appeal of Bouzaglou’s
alter ego, Ness, was heard and decided on the merits. In rendering its decision against
Ness, the California court of appeal rejected Ness’s broad argument that the evidence
was insufficient to support the fraud judgment against it. The state appellate court also
considered and rejected Ness’s argument that the large exemplary damages award was
disproportionate to the harm Haworth and Kathleen incurred or was the result of juror
bias. Even though we don’t know exactly what Bouzaglou would have argued on his
own behalf in that appeal, it is not unreasonable for us to assume that he would have
made essentially the same arguments and that he would have lost on essentially the
same grounds. Bouzaglou certainly has not said anything in the bankruptcy court or in
his appeal briefs to this Panel indicating that the merits of his state court appeal were
significantly different than Ness’s.
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exemplary damages award was unconstitutional. This argument needed to
be addressed, if at all, in a direct challenge of the judgment in state court.
Bouzaglou was not entitled to collaterally attack in the exception to
discharge action the amount of the exemplary damages finally
determined in the prior state court action. See In re Lopez, 367 B.R. at 106;
Roussos v. Michaelides (In re Roussos), 251 B.R. 86, 95 (9th Cir. BAP 2000),
aff'd, 33 F. App’x 365 (9th Cir. 2002).
It is worth noting that the California court of appeal did address and
reject the same damages argument Bouzaglou attempts to raise here. While
the merits determination in that appeal only involved Ness and not
Bouzaglou, he has not suggested any reason why the exemplary damages
award against him should or would be determined any differently than
how it was determined against Ness.
In sum, Bouzaglou’s damages argument does not support reversal of
the bankruptcy court’s application of issue preclusion or its grant of
summary judgment in favor of Haworth and Kathleen.
CONCLUSION
For the reasons set forth above, we AFFIRM the bankruptcy court's
summary judgment excepting from discharge Bouzaglou’s fraud debt.
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